Option Trading – Bull Call Spread

Posted on April 20th, 2012 admin No Comments

This is a recent trade of Option Expert William Chien, if you are interested in speaking to William about his option trading strategies call 07 5504 2244.

(This publication is not providing advice, it is just published as an example.)

 

FXJ appears to be resting on its long term uptrend line at the $0.72 level before it moves higher again (see below daily FXJ chart).

 

Hence, I would recommend the following FXJ bull call spread trade to take advantage of a potential rise in the FXJ share price.

 

Buy 400 May FXJ $0.75 call & Sell 400 May FXJ $0.85 call for a net debit of about $0.02 per spread GTC; costing about $800 in premium (before brokerage)

 

  • Low risk: maximum potential loss = $800 plus brokerage
  • No ongoing margin requirement
  • High potential profit: if FXJ trades up to $0.85 as per my projection, then we will achieve a profit in excess of $2,000 (see below payoff diagram)

 

Although the recommended trade size is 400 spreads, client can elect to trade a different size to suit their risk tolerance.

Please ring the Dealing Desk and ask for William on 1300 73 66 22 if you are interested in his Option Trade.

 

Option Trading - Bull Call Spread

Bull Call Spread: Past Recommendation

Posted on March 1st, 2010 admin No Comments

Below is a past recommendation on Oxiana which is now known as Oz Minerals (OZL). This Bull Call Spread demonstrates how the strategy works in real life.

OXR Bull Call Spread

Trade:

Bull Call Spread

Buy 12 OXR Feb 325 Calls @ 17

Sell 12 OXR Feb 350 Calls @ 9

Net Debit = 8 cents

This trade requires no margin requirements.

Maximum Profit

The ideal result is for both the share price to be above $3.50 at 28th February.

= Spread minus cost

= 0.25-0.08

= 0.17

On 12 contracts this is a return of $2040, which is 212.5% return.

Maximum Loss

This is the cost of placing the trade which is $0.08 which on 12 contracts is $960.

Breakeven

The breaks even at expiry is $3.25+$0.08 = $3.33.

Risk vs. Reward

Risk = 8 cents Reward = 17 cents

Risk vs. Reward = 1:2.125

Fundamental View

The fundamental analysis below outlines that OXR at the time of the recommendation was sound fundamentally.

OXR’s diversified asset base provides excellent exposure to buoyant copper, zinc and gold prices. The company’s medium and long-term production profile is very strong, with the Prominent Hill copper/gold project in South Australia, the Sepon Copper expansion in Laos and the Matarbe gold project in Indonesia expected to translate to significant production growth in 2009 and beyond. An expansion at Golden Grove in Western Australia is also likely to occur that should translate to a significant extension of that project’s operational life. (Source StoneBridge Research)

Technical Analysis

The below is the analysis on the OXR chart when this recommendation was made.

OXR is oversold and today the share price looks to be heading back up towards resistance at $3.60. The momentum indicators are crossing over indicating a buy signal. This means OXR has been oversold and the current share price increase indicates a change in trend. Below is a chart of Oxiana.

Chart


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

Bull Call Spread vs. Bought Call

Posted on February 26th, 2010 admin No Comments

There are a number of advantaged of implementing the bull call spread instead of buying a call. A bull call spread has lower risk than strictly buying call options, but limited profit potential. The advantages of a bull call spread over a bought call is that the strategy reduces time decay and volatility influence on the strategy pricing. This is because we are selling the out-of-the-money options therefore that option benefits from time decay and volatility reducing the opposite characteristic to a bought call. If a bought call is too expensive due to the high volatility then the bull call spread is a good strategy so the trade does not cost too much to enter and there is still a high percentage return possible. Another reason to trade bull calls is that you might have identified a resistance level; you can sell the out-of-the-money options at that level to reduce the cost and that will be the maximum profit level at expiry. The main benefit to just buying options is unlimited profit and a better delta meaning easier to exit the trade earlier.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

Bull Call Spread: Identifying Trades – The Greeks

Posted on February 26th, 2010 admin No Comments

Delta

When identifying trades it is essential to look at the delta of the option legs. In particular it is important to calculate the net delta of the bull call spread. The net delta is calculated by the delta of the bought option minus the delta of the sold option. The net delta of a bull call spread will always be positive. The net delta indicates if the share price increases quickly what the value of the bull call spread will be worth. For example, if a bull call spread had a net delta of 0.35, and the share price increased by $1.00, the bull call spread would have increased approximately by 35 cents.

Vega

The volatility affect on a bull call spread is varied. When looking to enter a bull call spread you look to buy an at-the-money call option. The idea is to buy a call which has a relatively low volatility and therefore trading at its theoretical value. The sold call which you are selling out-of-the-money you are looking for as much volatility as possible. So you are selecting an option that is trading a lot higher than theoretical value. This means you receive greater premium for that option and it makes the bull call spread cheaper to enter. A bought call is best purchased when volatility is low but when volatility is high and the call is too expensive a bull call spread is an alternative strategy. This is because the higher volatility on the bought option is offset by the high volatility on the sold option.

Theta

The effect of time decay on this strategy varies with the underlying stock’s price level in relation to the strike prices of the long and short options. If the stock price is midway between the strike prices, the effect can be minimal. If the stock price is closer to the lower strike price of the bought call, losses generally increase at a faster rate as time passes. Alternatively, if the underlying stock price is closer to the higher strike price of the sold call, profits generally increase at a faster rate as time passes.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 1300 368 316 or info@totaloptions.com.au

Bull Call Spread: Strategy Risk

Posted on February 26th, 2010 admin No Comments

It is important to always be aware of the strategy risks. The main risk to be aware when trading bull call spreads is there is a potential to lose all of money invested. Time decay is a risk if the share price stays still as the sold call option does not totally eliminate the risk of time decay. Also if the share price move happens too quickly the bull call spread may only have a small profit because the volatility would have increased in the out-of-the-money option, meaning it would be expensive to buy back to close out the trade.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 07 5504 2244 or info@totaloptions.com.au

Bull Call Spread: Trade Analysis – Risk vs. Reward

Posted on February 25th, 2010 admin No Comments

Trade Analysis

Analysing your trade is essential before placing the trade. You need to max sure you have the necessary detail and go through the following checklist:

  1. Stock Selection: Double check your analysis on the stock and make sure you share price target for the bull call spread is realistic.
  2. Determine entry cost, most important as it is also your maximum loss.
  3. Determine max profit and check that it is realistic.
  4. Make sure you have a good risk vs. reward.

Risk vs. Reward

The risk vs. reward of a trade should be calculated before placing the trade. The risk vs. reward ratio is the amount you are risking relative to the potential profit. For instance if you are risking $100 to make $200 profit then the risk vs. reward is risking 1 to make 2 (risk vs. reward 1:2). A bull call spread should have a risk vs. reward of 1:1.5 or greater. You should aim for a risk reward around 1:2. This means that you need to have a 33% success rate to be a successful trader. It also helps with your risk management by allocating a risk level per trade and a maximum profit level to take profits.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 07 5504 2244 or info@totaloptions.com.au

Bull Call Spread: Technical and Fundamental Analysis

Posted on February 25th, 2010 admin No Comments

Technical Analysis

Identifying bull call spreads can be assisted through technical analysis. Technical analysis allows identification of expected price movement through indentifying trends through momentum indicators and trend lines. Indicators which are used when identifying trade opportunities to enter a bull call spread are:

  • Share Price Uptrend
  • Oversold – MACD and Stochastic
  • Momentum indicators
  • Break out formations

Fundamental Analysis

Fundamental analysis can determine if a trade is viable or not. There are a number of fundamental factors that influence the option prices of a stock. When identifying a bull call spread you have a bullish outlook on the share. Therefore you are looking for a positive announcement either for the share, sector or share market in general.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 07 5504 2244 or info@totaloptions.com.au

Bull Call Spread: Options Pay-Off Diagrams

Posted on February 25th, 2010 admin No Comments

It is essential to understand the option pay-off diagram for the option strategy you are trading. It allows you to know to determine at what share price you achieve maximum profit, maximum loss and break even level at expiry. The bull call spread is made up of a bought call option and a sold call option at a higher strike. When combined it creates a bull call spread. See below for how the bull call option pay-off diagram is constructed. The dotted green line is the sold call and the dashed green line represents the bought call

Bought Call

 

 

 

Sold Call

 

 

 

Bull Call Spread

 

To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 07 5504 2244 or info@totaloptions.com.au

Bull Call Spread: The Psychology

Posted on February 24th, 2010 admin No Comments

The psychology or reasoning behind placing a bull call spread is determined by the expected share price move and analysis of “The Greeks” and how they affect the option prices.

The expected share price movement is bullish. However because you are selling an out-of-the-money call to receive a premium you cap the upside profit potential. The reasons for doing this are;

  • A premium is received and it lowers your entry cost.
  • Share price outlook may be a bullish share price increase towards a resistance level or a limited rise in share price.
  • Just buying a straight call options may be too expensive due to high volatility so selling an option against it may make the option trade affordable.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 07 5504 2244 or info@totaloptions.com.au

Bull Call Spread: The Strategy

Posted on February 23rd, 2010 admin No Comments

A bull call spread is used when a moderate rise in the price of the underlying share is expected. It is achieved by simultaneously purchasing call options at a specific strike price while also selling the same number of calls of the same asset and expiration date but at a higher strike. A bull call spread is also a technique to buy call options at a discount. Because you sell an out-of-the-money call option in this option strategy, it effectively reduces your investment on your bought call options. This reduces upfront payment and therefore the risk of the position.

Maximum Profit

Maximum profit is achieved when the share price is above the sold call at expiry. The maximum profit in this strategy is the difference between the strike prices of the bought and sold options, less the net cost of options.

Maximum Loss

If the stock price decreases below the bought call option at the expiration date, then the investor has a maximum loss of the net debit. The net debit is the premium received for selling the out-of-the-money call option minus the cost associated to purchase the call option.

Break Even

The breakeven is lower with the bull call spread then buying a call option. The breakeven point is the strike price of the bought call plus the net debit paid.


To receive ASX Option Recommendations or to learn more about Bull Call Spread, Bull Put Spread, Bear Call Spread, Bear Put Spread Strategies please request the Option Spreads eBook by contacting us on 07 5504 2244 or info@totaloptions.com.au